Tag: Capital Gains Tax

* Superannuation earnings (such as interest, dividends, rent etc.) are taxed at 15% when your account is in accumulation mode (i.e. not in pension mode). These earnings are tax-free when your account is in pension mode. By contrast, investment earnings on assets (such as shares, property, term deposits etc.) held outside of superannuation are taxed at your marginal tax

* Capital gains made by superannuation funds are likewise taxed at 15% when your account is in accumulation mode. Where a CGT assets supports a pension, any capital gain made when those assets are sold is tax-free. Any capital gain made by your superannuation fund is reduced to 10% (a 33% discount) where that asset has been held for 12 months or more. Although this is a lesser discount than the 50% discount available to trusts and individuals, this is negated by the base CGT superannuation taxation rate of 15%.

Therefore, as well as making provision for your retirement, by contributing to superannuation you can also enjoy the above tax concessions. From 1 July 2017 all individuals up to age 75 can claim an income tax deduction for personal superannuation contributions. Before this date, you could only claim a deduction for your personal contributions where less than 10% of your assessable income, your reportable fringe benefits and your reportable employer superannuation contributions (e.g. salary sacrifice contributions) for the year were from being an employee – this was known as the 10% Rule. This rule prevented most employees from claiming a tax deduction for this type of contribution. However, under the new rules, to claim a deduction, the following requirements must be met:

* Age – All individuals under the age of 65 are eligible. Those aged 65 to 74 meet the superannuation ‘work test’ (work for at least 40 hours in a period of not more than 30 consecutive days in the financial year in which you plan to make the contribution). For those aged 75, the contribution must be made no later than 28 days after the end of the month in which you turn 75. Older taxpayers are ineligible.

* Minors – If the individual is under 18 at the end of the income year in which the contribution is made, they must derive income in that year from being an employee or carrying on a business.

* Complying Fund – The contribution must be made to a complying superannuation fund.

* Notice Requirements – To claim the deduction you must provide your superannuation fund with a Notice of intention to claim a deduction form before you lodge your tax return in respect of that financial year.

Superannuation is also a great asset protection strategy. If a person becomes bankrupt, they may lose most (or all) of their assets. However, the Bankruptcy Act provides that the interest of the bankrupt in a regulated superannuation fund at the time of the commencement of the bankruptcy is not ‘property’ that can vest in their trustee in bankruptcy to be divided among creditors. Furthermore, if the superannuation fund pays a lump sum to a bankrupt (though not a pension) after the date of the bankruptcy, this money is also not divisible among creditors.

Contrbuting to superannuation is still as popular as ever. Personal (voluntary) contributions in the December 2016 quarter (the latest available statistics) were $4,616 billion, up from $4,437 billion in the same quarter a year earlier. Superannuation assets in aggregate were $2,199 billion at the end of the December 2016 quarter, up from the previous quarter which was $2,145 billion, and are now at an all time historical record level. Over the 12 months to December 2016, there was a 7.4% increase in total superannuation assets.

This section details why, even in spite of recent unfavorable changes, contribution to superannuation is still so popular.

Tax ConcessionsSuperannuation is a concessionally taxed environment. This was highlighted in early 2017, when the Government released its Tax Expenditiurs Statement which stated that in total superannuation tax concessions cost the Government $38.85 billion in revenue in the previous financial year. These tax concessions which make superannution so attractive as an investment include:CONCESSIONAL TAXATION OF EARNINGSSuperannuation earnings (such as interest, dividends, rent etc.) are taxed at 15% when your account is in accumulation mode (i.e. not in pension mode). These earnings are txax-free when your account is in pension mode. This concessional taxation cost the Government $16.85 billion in foregone revenue in 2015/2016. By contrast, investment earnings on assets (such as shares,property, term deposits etc.) held outside of superannuation are taxed at your marginal tax rate.Note that your tax liability outside of superannuation may be further reduced by tax offsets such as those for low-income earners and pensioners.

CONCESSIONAL TAXATION OF CAPITAL GAINSCapital gains made by superannuation funds are likewise taxed at 15% when your account is in accumulation mode. Where a CGT asset supports a pension, any capital gain made when those assets are sold is tax-free. On the other hand, if the CGT asset was held by one of the following entities it would be taxed as follows:

Individual – marginal tax rate

Company – 30% (or 27.5% for a Small Business Entity)

Trust – marginal tax rate of individual.

The tax on a capital gain made by your superannuation is reduced to 10% (a 33% discount) where the asset has been held for 12 months or more. Although this is a lesser discount than the 50% discount available to trusts and individuals, this is negated by the base CGT superannuation taxation reate being so low at 15%.

Cut Your Income TaxTAX DEDUCTION FOR CONCESSIONAL CONTRIBUTIONSSubject to age limits, from 1 Jly 2017 almost all individuals can now claim a tax deduction for their personal concessional (after-tax) contributions that they make to superannuation. Before this date, most employees were unable to do this.

The ATO has recenty published a list of behaviours and characteristics that may attract its attention. In order to minimise the chances of ATO scrutiny, this section provides the details.

Capital Gains Tax

CAPITAL LOSSESBroadly, the ATO is focussed on capital losses that on the face of it appear to be exaggerated, fabricated or misclassified; all with the aim or reducing taxable income. Specifically, the following attract the ATO’s attention:

For companies, if from the time the losses were incurred to the time they are used, other information indicates that the company had a change in ownership or there was a change in the type of activites being conducted

Capital losses that are artificially generated (for example, non-arm’s length transactions or through ‘wash sales’ where loss-making shares are sold and then bought back) with the express purpose to offset capital gains

Reclassifying capital losses as revenue losses with the aim of reducing taxable income

“Loss washing” whereby a taxpayer deliberately triggers a CGT event (e.g. sale) in order to bring to account an unrealised loss in a year in which a capital gain is made.

DISPOSALThe ATO focusses on your reporting and payment obligations resulting from a disposal of a capital asset. It has particular concerns where the amount of a net capital gain reported on a tax return is less than the ATO believes it should be based on their external data sources. The following specifically attract ATO attention:

Entities that fail to meet their lodgement obligations

Companies claiming the 50% CGT discount (other than life insurance companies, the discount for holding a CGT asset for 12 months or more is not available to companies)

Entities that receive cash through a partial scrip-for-scrip rollover. By way of background, you may be entitled to a scrip-for-scrip rollover and avoid CGT where a company in which you owned shares was taken over and you received new shares in the takeover company

Entities which dispose of high-value assests but record small capital gains or losses on their tax retun

Entities that incorrectly access the Small Business CGT Concessions. (Note that despite the increase of the Small Business Entity turnover threshold from $2 million to $10 milliion (effective 1 July 2016) this does not apply for the purposes of accessing the CGT concessions. To access the concessions, generally businesses must have an aggregated turnover of less than $2 million, or have net assets to the value of less than $6 million).

Fringe Benefits Tax

MOTOR VEHICLESThe ATO focuses on situations where an employer-provided motor vehicle is used or made available for use. This may constitute a fringe benefit and require an FBT return to be lodged. Note that an employer-provided vehicle will be deemed to be avalable for private use – and therefore a fringe benefit may arise – where an employee keeps it at their residence overnight (even if it not used).EMPLOYEE CONTRIBUTIONSAn employee contribution is an amount paid to an employer by an employee in relation to a fringe benetit, The contribution reduces the taxable value of a fringe benefit, and must be made by the employee from their after-tax income. These contributions will normally be assessable in the hands of the employer. The FBT legislation describes three types of employee contributions:

The increased SBE threshold of $10 million also applies to the rollover for restructures of SBEs. To recap, this measure allows SBEs to change their operating structure without incurring capital gains tax or other income tax liabilities. It does this by providing an optional rollover (deferring any CGT liability or income tax liability until the asset is eventually sold) where an SBE transfers an active asset of the business to another SBE as part of a genuine business restructure, without change the ultimate economic ownership of the asset. The rollover may also be available for assets that are used by the SBE but held by an entity connected or affiliated with the SBE or, if the SBE is a partnership, a partner of that partnership. This ensures that partners and other ‘passive entities’ within an SBE that are not themselves SBEs (because they do not carry on a business themselves) can access the new rollover. Under the rollover, specifically, from a CGT standpoint:

No capital gain or loss will accrue to the Transferor. The Transferee will be treated as acquiring the asset on the date of transfer for an amount equal to the cost base of the asset.

Pre-CGT assets will retain their pre-CGT status post-transfer.

For the purposes of the 50% CGT discount, the ’12-month clock’ will be reset, such that the Transferee will need to hold the asset for a further 12 months following the restructure to avail themselves of this discount.

For the 15-Year Exemption however, the Transferee will be taken to have acquired the asset back when it was originally acquired by the Transferor.

As the $10 million increased threshold is backdated to1 July 2016, tax returns may need to be amended in respect of capital gains made and declared from restructures after this date. Amendments may result in refunds where any capital gains liabilities have been paid.

CGT Small Business Concessions – No change

Unfortunately, the increased $10 million SBE threshold does not apply to the CGT Small Business Concessions (i.e. the Active Asset Reduction, Retirement Concession, Rollover, 15-Year Exemption). To access these concessions, the standard criteria must be met, namely you and connected entities must be met, namely you and connected entities must have net assets to the value of less than $6 million or your annual turnover (including connected entities and affiliates) must be less than $2 million.

Are you buying or selling property? If so, you need to be aware of the newly adjusted withholding rules, which are now set to impact a much wider range of property sales.

BackgroundLast year Federal Parliament passed legislation designed to collect gapital gains tax (CGT) from non-residents selling certain Australian property from 1 July 2016.Although the law is targeted at foreign Sellers, given the way the legislation was drafted, all Sellers of property (resident or non-resident) may be impacted. The new law required that for all property sales of $2 million or more, the Buyer was required to withhold 10% of the sale proceeds and remit that amount to the ATO without delay – unless the Seller obtains a Clearance Certificate from the ATO before settlement.The legislation doesn’t just apply to individuals but also Companies, Trusts, and Superfunds. Further to this, it is the Buyer that can then be penalised by the ATO for failing to withhold and remit the withholding tax.

What’s Changed?In the May 2017 Federal Budget, the Government made the following two changes:

Increasing the CGT withholding rate for non-residents from 10% to 12.5% from 1 July 2017, and

Reducing the real property exemption threshold from $2 million to $750,000 from 1 July 2017.

These changes mean that many more txpayers will be impacted by the new regime. Given this, we now examine the law in detail.

ConditionsThe new withholding regime applies to contracts entered into on or after 1 July 2016 where the following three conditions are met:

1. THE BUYER ACQUIRES CERTAIN ‘TAXABLE AUSTRALIAN PROPERTY’This includes

Lease premiums paid for the grant of a lease over real property in Australia

Mining, quarrying or prospecting rights

Interests in Australian entities whose majority of assets consist of the above such property or interests (e.g. shares in a company or units in a trust) or

Options or rights to acquire the above property or interest.

2. THE SELLER IS A NON-RESIDENT OR HASN’T PROVIDED A CLEARANCE CERTIFICATE FROM THE ATONote that where there are multiple Sellers in the one tansaction, this condition will be met where any of the Sellers is a non-resident.This condition is the ‘kicker’. The rules can catch Australian resident Sellers if they do NOT obtain a Clearance Certificate from the ATO.

3. NONE OF THE FOLLOWING EXCLUDED TRANSACTIONS ARE THE SUBJECT OF THE SALE(a) Real property transactions with a market value of less than $750,000 (downd from $2 million). As well as sales of real property, this exemption………..